Useful Tools

Can I pay rent to my parents to save tax?

HRA or house rent allowance, is the most common allowance received by the salaried. Those who live on rent can save tax on HRA.

Very soon employers will start collecting tax saving declaration for the financial year.

Are you worried about how to claim HRA if you live with your parents?

Those who live with parents, can pay them rent and save tax on HRA.

Let’s find out –

How to claim HRA by paying rent to parents?

Understand how to save tax by paying rent to parents with an example.

Points to remember to claim HRA by paying rent to parents

Ownership of the house – Since rent is paid to owners, the property must be owned by your parents. It may be owned by one or both of your parents. Remember that you cannot be an owner or co-owner of this property. Since you cannot claim tax exemption on rent paid to yourself.

Paying rent – You must pay rent to them. You can do this by transferring rent to their bank account or pay via cheque. This way you will be able to support your HRA claim properly.

Rent agreement and rent receipts – Usually employers ask for a copy of rent agreement for their records. They can also request for rent receipts to allow you HRA exemption. You can enter into a simple rent agreement with your parents. You can prepare rent receipts by using ClearTax’s rent receipt generator – see here. You can print these receipts and submit to your HR/payroll department. Or you can download them and save them in your computer. It is important to keep proper records in case the assessing officer ask for them.

Rental income is taxable for parents – Rent paid by you to your parents shall be taxable for them. They will include this income under the head ‘income from house property’ in their tax return. They can claim property taxes paid by them and also claim 30% standard deduction from this rental income.

Save tax as a family – By submitting rent receipts and paying rent, you will be able to claim exemption on HRA. Your parents can deduct property taxes and also claim 30% standard deduction on rental income. If they are in a lower tax bracket than you, the family can save tax as a whole. If they are more than 60 years old, they will also enjoy a higher minimum income exemption limit (Rs 3lakhs for more than 60 years old and Rs 5 lakhs for more than 80 years old). In case they do not have any taxable income, you will be able to save significant tax as a family.

Example

22 years old Aditya lived in Dwarka, New Delhi with his parents. His office was in Gurgaon and he used to commute daily to his office from Dwarka. Aditya had recently started working, and his employer asked for tax saving declarations for FY 2016-17 to calculate TDS on salary. Aditya’s colleagues who lived in Gurgaon in PG accommodation were submitting rent receipts to claim HRA. HRA is paid to them as part of their salary. Aditya is unsure if he can claim HRA since he lives with his parents.

This is the detail of salary earned by him.

Basic Salary

3,00,000

HRA

1,50,000

Special Allowance

1,25,000

Total

5,75,000

Total tax

0-2.5L

–

2.5lakhs to 5lakhs

25,000

5lakhs to 5.75lakhs

15,000

total tax

40,000

cess

1,200

total tax + cess

41,200

Now, using ClearTax’s HRA calculator, let’s find out how much HRA will be exempt if Aditya decides to pay rent to his parents.

HRA exemption calculation

Case 1

Case 2

Case 3

HRA per month

12,500

12,500

12,500

Rent paid

12,000

12,500

13,000

HRA exempt portion

9,500

10,000

10,500

HRA taxable portion

3,000

2,500

2,000

Revised Taxable Salary

Basic Salary

3,00,000

3,00,000

3,00,000

Taxable HRA

36,000

30,000

24,000

Special Allowance

1,25,000

1,25,000

1,25,000

Total taxable salary

4,61,000

4,55,000

4,49,000

Total tax

0-2.5L

0

0

0

2.5lakhs to 5lakhs

21,100

20,500

19,900

5lakhs to 5.75lakhs

total tax

21,100

20,500

19,900

rebate under section 87A

5,000

5,000

5,000

cess

483

465

447

total tax + cess

16,583

15,965

15,347

Tax Saved

24,617

25,235

25,853

However, rent paid to Aditya’s father will have to be included in his father’s total income.

Let’s take Case 1, where Aditya decides to pay rent to his father of Rs 12,000 per month. His father’s rental income is Rs 1,44,000 for the whole financial year. Besides this income, his father has interest income of Rs 3,00,000. His father is 65years old.

Let’s find out taxable income of Aditya’s father, before receiving rent and after receiving rent from Aditya.

Income tax calculation of father with and without rental income.

Taxable Income of Aditya’s father

with rental income

without rental income

Interest income

3,00,000

3,00,000

Rental income

1,44,000

Less: taxes paid

3,000

Less: 30% deduction

42,300

1,01,700

–

Total taxable income

4,01,700

3,00,000

Tax

0-3L

–

–

3L-5L

10,170

–

Rebate under section 87A

5,000

Cess

155

–

total tax + cess

5,325

–

Total tax saved as a family = Rs 24,617 less Rs 5,325 = Rs 19,292

I could not submit receipts on time and have not claimed HRA through my employer?

If you are not able to submit rent receipts in time to your employer and your employer deducts TDS on HRA, don’t worry. HRA exemption can be claimed at the time of filing your income tax return. You can adjust your total taxable salary with HRA exemption amount, while filing your return on ClearTax. Do remember to keep proofs (rent receipts, rent agreement) safely. Just in case the assessing officer asks for them later.

Efiling Income Tax Returns(ITR) is made easy with ClearTax platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with ClearTax GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. ClearTax can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with ClearTax by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download ClearTax App to file returns from your mobile phone.